Friday, 30 December 2016

Eildon Capital

Overview

Eildon Capital is currently a
subsidiary of the publicly listed investment company CVC Limited. The
company focuses on high yield debt and investments in the property sector. They
plan to raise between 2 and 10 million dollars via the IPO, with a market
capitalisation on completion between 24 and 32 million. In the prospectus, they
state that their goal for debt yields on property are between 12 and 18 percent
before management fees and taxes. As a Mezzanine finance company, security on
these loans will usually be equity in the ventures themselves.

There’s a lot of things to like about
this prospectus; an experienced and stable management team, a good track record
and at least on the surface a reasonable price, with every one dollars’ worth
of shares bought giving you $1.01 of net assets in the newly created company.
I’ve got a few misgivings though, and there are three main reasons I won’t be
taking part.

The
property sector

As a long term believer in the idea
that the housing market is overdue a downward correction, it’s hard to think of
who would be more exposed to this than a company specialising in high yield
property development loans. A substantial portion of their current assets are
mezzanine loans to apartment developments in Melbourne, the Gold Coast and
Brisbane. When I think “housing bubble,’ an apartment development in the Gold
Coast is probably one of the first things that comes to mind. While Eildon
stress in the prospectus that they have ways to mitigate their risk, if they
are getting double digit yields on loans it’s hard to believe they are able to
protect themselves that well.

Vanda
Gould

Another thing that makes me a little
suspicious of this listing is a controversy that has been hanging around Eildon
capital’s current parent company, CVC Limited. Founded in 1985, one of CVC
Limited’s founding directors and chairman for many years was a guy called Vanda
Gould. Vanda Gould resigned in 2014 after becoming embroiled in a lengthy
dispute over tax avoidance with the ATO. He recently lost an appeal to the high
court over a tax bill of more than $300 million for companies he owns and
advises, and is also facing criminal charges relating to tax avoidance that
could potentially land him in jail. The guy seems like one of the real
characters of Australian investing, his chairman’s letters for CVC would
regularly get pretty philosophical, quoting Shakespeare and referencing
interest rates from ancient Rome and Babylonia. While these days he holds no
position at CVC and you won’t even find his name on the website, it’s hard to
believe he is completely disentangled from all of CVC’s various affairs. To
give an example of a potential continuing connection, over 10% of the shares of
Eildon capital will be held by a company called Chemical Trustees Limited on
listing, a company that had its assets frozen in 2010 due to alleged tax
avoidance in relation to Vanda Gould. I have no idea if there is still any
connection between Chemical Trustees and Vanda Gould, but if they end up having
to sell their holding in a hurry or the shares are seized it could have a
significant effect on the share price.

Pricing
concerns

The last thing going against this
prospectus is CVC Limited’s current share price. With net assets of $214
million as of the end of the last financial year, CVC’s market capitalisation
has hovered around the 196 million dollar mark for the last couple of months.
This means every 1 dollar you invest in CVC Limited buys you $1.09 of net
equity on CVC’s balance sheet. That’s 8 cents more than you will get of Eildon
Capital’s equity if you take part in the IPO. As CVC currently owns Eildon
capital, this could mean that the IPO is priced above the current market price.
Of course, it’s impossible to know for sure what assets exactly on CVC’s
balance sheet the market is undervaluing, but it could just as well be the
Eildon capital assets as anything else. If this is the case, there is a real
danger the share price will drop by around 6% or 7% upon listing. If you are a
long term believer in the company this may not bother you, but it does mean you
may need to commit to holding these shares for quite a while if you want to
make money.

Verdict

Despite all these issues, the target
returns will no doubt be enticing for some investors, and if you have an
appetite for a bit of risk and are not currently that exposed to the housing
industry taking part in this IPO could make sense. For me though, my scepticism
of the housing market along with concerns about the Vanda Gould connection
makes me happy to give this one a miss.

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About Me

This blogs purpose is to answer a simple question: Can a normal investor tell a good IPO from a bad one? My goal is to review as many IPO's as possible and track my picks as I go. All opinions are my own.